WHENEVER a product is sold--whether the seller be manufacturer, wholesaler, or retailer--on other than a cash basis, the seller is engaged in selling not only merchandise, but also credit. Credit is something which should be sold, in the interest of general economy, only by those in the business of banking. Whenever credit, especially long credit, is offered, apparently "free," to persuade someone to buy, it adds an item of expense to the cost of marketing the far-reaching importance of which is not generally recognized. Fortunately, reckless credit given as a means of promoting sales is so obviously filled with danger, that except in the case of installment selling, it has as yet few defenders. Yet it is an amazing commentary on the times that a well known accountant (William R. Basset, "Selling Where the Profits Are," Advertising and Selling Fortnightly, August 12, 1925.) writing in a business journal should in all seriousness have urged this kind of high pressure credit as the solution of the troubles of some of those manufacturers who are confronted with imperious need for increased sales.

  Consider, for example, a concern which for years had been very rigid in its credit policy. A great many of the contractors who are the users of the commodity which it makes have no credit rating and are notoriously poor business men. The concern absolutely refused to sell to them, overlooking the fact that some one--probably a competitor--was supplying their needs.

  This concern's product was sold at a gross profit of 30 per cent on the selling price.

  A very careful study of the market which was shut out because of a determination to keep credit losses below 1 per cent showed several interesting things. One was that by lowering the bars to the point where only $4 out of every $5 of the new business was reasonably sure to be collected, an additional volume of $500,000 would be secured with no additional selling cost. In other words the credit department had been refusing one-ninth of the business which the existing selling force could sell although 80 per cent of what was turned down could probably be collected. The company had been doing a business of $4,000,000 at a selling cost of $1,200,000. Even though bad debts on the extra $500,000 amounted to 20 per cent, the company's net profits would increase $100,000.

  The suggestion that this policy be followed brought forth terrible wails from the credit department and the treasurer. The sales department was for the idea from the start and in time, the owners decided that an extra $100,000 in dividends was more to be desired than a self-satisfied credit department.

  Pride in the ability to keep losses low is sometimes very costly. It is entirely possible to eliminate bad debts entirely by the simple procedure of refusing to sell anything to any one. Ridiculous you say? Only in degree. As long as net profits can be increased what difference does it make what the credit losses amount to?

  What difference does it make? Mr. Basset challenges the world to produce a reason for refusing to debase the standards of credit giving. Only one need be furnished. If competition between manufacturers is based upon liberal--I prefer to call it reckless--credit giving, it results in keeping in trade a host of parasites who ought not to be in the business either because they are dishonest or inefficient or both. The man who advocates the extension of reckless credit must be a man so obsessed with the mania to sell, that the general welfare of his own industry and of business in general is of absolutely no interest to him.

  But if this kind of high pressure credit is without a really dangerous number of advocates, there are a legion of advocates for high pressure credit in the form of installment selling. What is more, most of those who are its advocates are also its practitioners. It has proved to be an effective means of stimulating the ultimate consumer to buy what otherwise he could not buy so quickly,--to stimulate buying by mortgaging future income. So today we are having an orgy of installment selling, to the tune of "after us the deluge!"


  What a change since Pollonius said, "Neither a borrower nor a lender be."

  At the time this is being written there are six hundred time payment finance corporations which take care of the installment payments for purchases of automobiles, and new finance corporations are being organized daily. (A year after this was written, Clarence Y. Palitz, president of the Credit Alliance Corporation, made a survey of installment selling and estimated that there were more than 1,500 organized finance companies, and more than 2,500 individuals dabbling in the finance business.) A single concern selling diamonds and jewelry on the installment basis, numbers 300,000 customers. A checkup of twenty-seven newspapers in fifty-seven cities between November 11 and December 20, 1923, (Printers' Ink, February 1924.) showed 141 advertisements which made a direct appeal for time payment sales on the following products:

  Furniture        Sewing Machines     New Autos
  Pianos           Women's Apparel     Typewriters
  Used Cars        House Furnishings   Diamonds
  Clothing         Safes               Vacuum Cleaners
  Radio Equipment  Lamps               Washing Machines
  Stoves           Violins             Candy and Nuts
  Rugs and Carpets Cedar Chests        Gifts 
  Jewelry          Silverware          Trucks 
  Phonographs      Kitchen Cabinets

  This is by no means a complete list of the products sold on the installment plan. Some of the more amazing developments of this phase of high pressure marketing include the following: house paint to home owners; ice and coal to stimulate buying in the off season; summer and winter vacations; automobile insurance; plumbing fixtures; convention expenses; ready-cut houses; tours on the "travel now and pay later" plan. The future development of this phase of marketing is evidently charged with unlimited possibilities.

  In 1915 and 1916 when the business of selling automobiles on the installment plan was first introduced, it met with bitter hostility on the part of many of the most influential men in the automobile industry. The "pay as you ride" policy had to fight for an opportunity to show what it could do. Automobile manufacturers of those days considered the policy of selling for cash only, which had prevailed up to that time, very largely responsible for the growth of the industry, since it gave the infant industry cash resources at a time when ordinary bank credits were difficult to secure. It was generally predicted that once the time payment plan was introduced, the used car problem would multiply to a point which would enormously increase the cost of selling. At that time, time payments may be said to have been zero. By 1920, the General Motors Acceptance Corporation, which handled all the installment business of the Chevrolet, Buick, Oakland, Oldsmobile and the Cadillac automobile companies, reported approximately 50 per cent. of sales on the installment plan. Today it is estimated that over 85 per cent. of all of the automobiles which are sold are sold on the time payment plan.

  According to the National Automobile Chamber of America reports, it is estimated that the retail value of automobiles purchased and sold in this country in 1923 was approximately two and one-half billion dollars. If 85 per cent. of these sales were made on time payments, $2,125,000,000 worth of automobiles were sold in that way.

  During the antebellum period when installment selling had not yet taken its first steps towards respectability, it was very largely confined to sewing machines, books, furniture, and pianos. The business was very largely in the hands of unscrupulous canvassers and unprincipled retailers. The entire business was saturated with deceitful advertising, untruthful salesmanship, and bulldozing collection methods. It has since that time changed its outer habiliments. But its underlying economic nature has not changed.

  Installment selling, which originally was a rather unscrupulous method used only by the "shysters" of trade, has now been taken over by "big business." It has been systematized, organized, and made respectable.

  Modern methods have furnished installment sellers what they badly needed: a respectable facade for houses of organized usury. One study ("The Arguments For and Against Instalment Buying," by Q. F. Walker, economist for R. H. Macy & Co., Inc., New York City.) of installment selling proves this by calling attention to the fact that--

  Most installment selling plans compute interest on the aggregate cost of the article and do not charge interest at a fixed rate on a decreasing balance of payment. The result is that the interest charges on such purchases often aggregate 25 to 30 per cent or more. The customer is never told the plain truth about the interest cost in his purchase.

                       Rates Finance   As It     Total Cost
  Balance Payable in    Company Say   Actually  of the Credit
                        They Charge    Figures   to Consumer

4 months .............      4%          22.32%     48.00%
5 months .............      4½          21.04      40.00
6 months .............      5           20.16      34.27
7 months .............      5½          19.52      30.00
8 months .............      6           19.03      26.66
9 months .............      6½          18.68      24.00
10 months .............     7           18.40      21.81
11 months .............     7½          18.18      20.00
12 months .............     8           18.00      18.45
         Average .......... 6%          19.48%     29.24%

  People who twenty years ago would have scorned to purchase anything for which they could not pay, and who looked upon such methods of buying as befitting only the ignorant or improvident, today buy bigger homes, bigger automobiles, and even bigger radio receivers than they have the money for which to pay.

  The tragedy of the appeal to buy on the basis of credit can be expressed in one word, "overbuying." The victims of this tragedy are the owners of books that are not read, pianos that are not played, and phonographs, radio receivers, automobiles, and even homes, the installments on which are a perpetual tragedy. (The Nation, May 19, 1926.)

  The American Surety Company made an analysis to determine the chief causes for moral lapses on the part of defaulting employees--for which lapses, up to the face of the policy, the American Surety Company undertakes to indemnify employers. With such a practical problem before him, it is probable that the investigation of B. J. McGinnis, manager of the Claim Department, was a thorough one and that its conclusions are worth listening to:

  "It has been evident for some time that defalcations by employees handling money and securities are on the increase. . . . It is clearly shown by our reports that there are several ruling factors which cause men to become dishonest. Fashions change in crime as they do in medicine and in other fields, and so do inciting reasons. Today the desire to own an automobile or a large car, it is revealed by our studies, lies at the bottom of the peculations of many employees--whereas a few years ago racetrack gambling stood among the leading causes of 'inside' theft. It is not always the joy-rider who steals either--it is often the young married man whose wife insists upon having a car in addition to a fur coat, platinum jewelry, and all the luxuries of modern life."

  Mr. McGinnis pays his respects to installment buying. He recites the case of one defaulter whose rent and installment payments on an automobile ALONE equaled his salary. In addition he was purchasing a fur coat and jewelry for his wife, and

"has enough extra to make a social hit in the neighborhood. . . . Changed standards of living are often responsible for peculations. Defaults are not always DUE to economic pressure (of sheer poverty) but to a desire to live in a luxurious way and impress the neighbors. Luxuries are born faster today than ever before, and every one of them can be bought 'on time.' "

  In a book dealing with economics, the tragic aspect, since it affects only the consumer, must be subordinated to the economic aspect. What concerns us directly, therefore, is the possible effect of this flood of installment selling upon the general prosperity.

  Sewing machines, one of the first items to be sold by high pressure marketing methods, in which installment selling, house to house canvassing, and advertising are all used, are sold by intensive campaigns which cover every street and road in the civilized world--and much territory not really civilized. Ten to twelve per cent. of the machines sold are returned, but losses on bad debts are only 2 or 3 per cent. of sales. Contracts, however, sometimes run two and three years. Some glimmer of what this costs the consumer of sewing machines may be gleaned from the fact that sewing machine companies allow a 20 per cent. discount for cash and consider 30 days as cash. If sewing machines were marketed on some less extravagant and wasteful plan, the consumers would have at least 25 per cent. and perhaps as much as 33½ per cent. of all that is spent for sewing machines with which to purchase other things.

  The furniture business and the business of selling pianos, owing to the ignorance of consumers as to values, lend themselves to installment selling almost as well as the business of selling deluxe books. Mark-ups have to be above 100 per cent. in order to make the installment furniture business safe and profitable. In the installment book business mark-ups are apt to be 500 per cent. A set of books which costs $10 to manufacture is usually sold on the installment plan for $50.

  A great variety of costs beginning with the losses on bad debts make these extravagant margins necessary.

  The systematizing of installment selling today has not resulted in any more scientific selection of risks. The loss on bad debts is substantially the same as in the past. Modern methods have merely produced a larger scale of operations and enabled installment sellers to distribute the risks so widely that strict credit checking has become a short-sighted policy. The additional profit to be secured by selling surplus production to the more hazardous classes of debtors is weighed against the probable total increase in bad debts, and if the estimated losses are less than the estimated increase in profit, the greater hazard is disregarded.

  While the loss on bad debts is often kept down to small amounts, as little as 1 per cent. being quite common, this is probably the smallest item of cost involved. For instance, one furniture house estimates its losses on bad debts as 4 per cent.; its cost of collecting 4 per cent.; its cost of accounting 3 per cent.; and its cost of investigating ½ per cent.

  Another very large addition to the installment costs comes with selling. Salesmen have to be paid regularly each week, or as sales are made. Salaries and commissions have to be paid promptly. But in the installment business they are not earned until the installments are fully paid. The result is that the manufacturer or retailer operating on the installment plan has to invest large sums for selling expenses in addition to laying out the cost of the merchandise. With this comes a special kind of loss peculiar to installment selling, for whereas the installment house may recover some portion of its accounts by taking back the merchandise when the customer defaults, it rarely recovers what it pays out in commissions and salaries on defaulting accounts to salesmen who have left it for other employment.

  Then there is the cost of the capital used in the business. But for the fact that it still takes a large amount of capital, and used to take a very much larger amount of capital to conduct the installment business, scarcely anybody in the country would do business on a cash basis. Many of the failures in the installment business have been due to insufficiency of capital. This has contributed not merely to the failure of local retailers, but to that of many large corporations, both those selling products like phonographs to the general public and those selling machinery for use in agriculture and factory production. The capital necessary to conduct an installment furniture business is figured variously from one and one-half times as much as a cash business, to five times as much. This capital is tied up and not only has the cost of carrying it to be paid for, but also the cost of collecting it in dribs and drabs from the customers.

  Before summing up, let me quote upon this subject one of the country's most far-sighted business men. In 1926 Senator James Couzens of Detroit made the rather dramatic announcement that he was "discontinuing at once" his business of making electric refrigerators because of the practice of installment selling. It was installment selling that was to blame for that drastic step, said Senator Couzens.

  There are economic laws that none of us can safely break. The electrical refrigeration industry has mortgaged itself to the installment system, and in my estimation it is being seriously misused. Installment selling methods are being permitted to fasten themselves upon industry in general, and it has yet to weather the storm which inevitably follows such practices.

  I personally refuse to sacrifice what experience has taught me are basic principles, for sales methods that attempt to justify the sale of the product through "thirty-day trial offers" and "down payments" as low as 2 per cent--with two years to pay the balance.

  The aim of this company was to build a low-priced unit for the average home. We had built, and were on the verge of announcing, this machine when the present decision was reached. Even with a low-priced unit it appears futile to continue in view of the sales methods existing in the industry. For as rapidly as the manufacturer reduces his costs and prices, the dealer, through circumstances forced upon him by the installment believers, adds "installment charges" to the list price. He does this because, to compete on two-year payment terms, he must protect himself on the maintenance and service expense loaded upon him by the customer who has bought on unreasonably long terms.

  Thus the customer pays for America's wide spreading installment system.

  There are six outstanding points in connection with installment selling:

  1. The installment method of selling has increased steadily since its introduction in the furniture and book fields and much more rapidly both in volume and in variety of products during the last few years.

  The Department of Domestic Distribution of the United States Chamber of Commerce (Women's Wear, March 26, 1926, p. 8.) estimated that 17 per cent. of all goods sold at retail in 1925 was paid for on the installment plan. This indicates a volume of installment business of from six to seven billion dollars per year.

  2. The time payment plan is really a form of anticipating normal sales. The immediate effect of anticipating normal sales is to unduly stimulate investment in production facilities, and the ultimate effect is to curtail buying by the consumer until income has caught up with debt.

  3. It results in a reduction in sales for cash and an increase in sales on credit, and thus very considerably increases the cost of distributing all goods. The total consumption of goods is reduced and income which might have been expended for merchandise is really dissipated in carrying costs.

  4. The rate of depreciation on many kinds of goods is more rapid than the rate of payments upon them. In some cases the consumer actually has to continue paying for merchandise long after it has been consumed. This fact not only lessens the security back of the credit, but it demoralizes the debtor and reduces the earning capacity of those who habitually buy in this way.

  5. The cost of handling the unprofitable accounts is naturally shifted to those who do pay their installments, and they pay proportionately more for their credit. Thus we have really a system of selling which operates to burden those honest but thoughtless persons who do not see that what they are really doing is paying for the extravagances of those who dishonestly buy on the installment plan.

  6. Those who offer time payments compete with each other on liberality of terms rather than on quality and price of merchandise.

  Any competition not founded on quality, service, or price is demoralizing and dangerous to those who engage in it. Cash selling does not favor the dishonest at the expense of the honest--it does not burden the thrifty because of the extravagance of the wasteful. Credit selling, regardless of whether it is done by a concern doing part cash and part credit business, or all installment business, always burdens those who do pay with the costs of losses for selling to those who do not.